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Saturday, December 24, 2011

Left behind by lemmings

My latest Courier article.

I take a break from talking about the bad news on the energy resources front to return to talking about the bad news on the financial crisis front – most especially the delightful effect of David Cameron's 'No' at the European summit. Is British politics about to become interesting again?

What I mean by that is that for the last few decades more and more of the significant decisions that affect our lives have been taken at a level above that of the British parliamentary system. Yes, we are 'represented at the table', but I'm sure I'm not the only one to believe that the influence flowing from that position is over-rated (and to find some of the recent fretting a touch comical. It's not 'Where's Wally?' it's 'Where's Clegg?'). Yet with this 'No' it would seem possible – and I mean simply 'possible', not 'likely' or 'probable' – that some measure of autonomy might return to our national life.

What is the crucial thing to understand about this recent crisis? Well, I thought this picture summed it up rather well:

The language being used is of establishing a 'fiscal union' – that is, that there is some form of common governmental budget-setting, to be enforced by some central authority yet to be precisely defined – in order to establish the financial bona fides of each government, thereby allowing them to continue to borrow at rates that will not cripple their economies, with the hope, thereby, that the financial crisis can be eased. Now there are so many elements wrong with this vision that it is difficult to know where to start, but let us focus on Germany, for the German political system has made very clear that there can be no joint-liability for government debt. According to the German constitutional court “No permanent treaty mechanisms shall be established that leads to liability for the decisions of other states, especially if they entail incalculable consequences...” In other words, whatever it is that Merkel and Sarkozy have been trying to put together, Germany will not be accountable for the debts of Greece.

This is where the problem lies. In order for Greece, say, to be able to function economically, it has to be able to cover the cost of its debt – and this cost is seen in the interest rate of Greek government bonds. When that rate is low – say around 2% - then the sums add up. When that rate starts to get higher – and the danger rate is thought to be around 6% or so – then the sums do not add up. Now one way out of that problem, for a government like Greece, would be for there to be genuine 'Eurobonds', backed by a common European government and drawing on the credibility of the Eurozone as a whole. This, however, is what the German courts have forbidden. Instead, what has to happen is that the local government has to either raise taxes, or cut spending, or both. This is just about possible when the relevant government is enabled to make that decision itself, although even then it is politically extremely difficult. What is being proposed, however, is that the local governments will no longer have autonomy over these decisions, and instead some Eurocratic institution is going to enforce these judgements. So instead of a Greek government choosing to balance its books – and perhaps, gaining the authority to pursue that path through a referendum – the Greek government is simply going to be an administrative arm of the European government, which is where the decisions will be made – and who, rather pointedly, have forbidden such a referendum from taking place.

This is not a long-term solution to the crisis; in fact, it is a recipe for increasing short-term disaster. Imposing technocratic governments upon the allegedly “insolvent” nations of Italy and Greece is simply increasing the perceived illegitimacy of each government. It won't be long before there is bloody revolution – and a large part of the problem is that this will be seen as a German desire for control, built upon a basis of German hypocrisy. Ponder the fact that the German economy has been benefiting hugely from an undervalued currency – possibly as much as 30% less than where an independent Deutschmark would be – and that this undervaluation is what has enabled the German economy to perform as well as it has, and for German government bonds to be obtained as cheaply as they have. In other words, it is not simply that the German approach is 'virtuous' it is that – to put it starkly – the southern European countries have effectively been subsidising the northern. The honourable course – and the one with the only prospect of preserving a functioning Eurozone – would be to go all out for a comprehensive fiscal union for the countries that use the Euro, and to establish a common taxation and budgeting system; in effect, a single government. This is what enables the United States to function with a single currency. Yet this is exactly what is impossible for Europe.

So the proposed solutions will not work – and I haven't even touched on the fact that the sums of money being discussed are trivial compared to the size of the debts, nor the way in which the government debt problems interact with the wider banking debt problems, nor the fact that, frankly, it is all too little, too late. What we are witnessing is the spectacle of a generation of politicians committed to a particular path whose only response to a crisis is to say 'further and faster'. Sadly, reality has changed, and the further and faster simply means going further and faster over the cliff, with all the destruction and devastation that follows. If Britain is being left behind then we are being left behind by lemmings, and that is not a bad place to be.